Hurdle too high for Telstra

Telstra will be very tempted by the prospect of owning Consolidated Media Holdings, but the regulatory and financial obstacles to any deal look virtually insurmountable.

In digital media, Telstra is looking for growth, but also a way to drive traffic on its networks. There are a paucity of assets that satisfy both criteria, but Foxtel and Fox Sports are two of them.

Exclusive video content will be a crucial differentiation point for carriers under the levelled playing field of the national broadband network and, arguably even more importantly, as “4G” handsets able to cope with large amounts of data become available.

Telstra has managed to achieve top line growth in mobiles, thanks to a combination of foibles at Vodafone, and the incredible popularity of Apple’s iPhone and iPad devices. But average revenue per user has been stagnant, Vodafone is in the early stages of what looks like a turnaround, and smartphone penetration rates are nearing a peak

Facing these challenges, and with its directories arm Sensis in structural decline, Telstra desperately needs to find new sources of growth and will be examining ConsMedia closely.

But chief financial officer Andy Penn has made it clear the telco will only pursue acquisitions that are accretive to earnings per share after two years – more so than a buyback of the same magnitude – and that deliver a return on the company’s weighted average cost of capital after three.

All things being equal, a Telstra purchase of Consolidated Media Holdings could fail at the first hurdle. Using a bid price of $3.27, which is some distance below the $4 per share James Packer is rumoured to be seeking, CLSA analyst Digby Gilmour estimates that such a deal would actually dilute Telstra’s earnings by 0.7 per cent per share in fiscal 2014.

That’s before the serious regulatory issues are even considered. ACCC chief Rod Sims has made it clear he would not look kindly on Telstra gaining control of Foxtel or exposure to 50 per cent of Fox Sports. In a world of increased bundling, he fears Telstra’s exclusive access to sport could strangle its rivals like Optus in downstream markets such as broadband and mobiles.

Packer is unlikely to be willing to subject himself to what could turn out to be very long regulatory battle. And for Telstra, the undertakings that would invariably ensue could make any deal difficult to swallow.